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The Employee Retention Credit (ERC) was launched by the federal government to provide financial relief to small businesses that kept employees on the payroll throughout the pandemic. The credit is available for the 2020 and 2021 tax years, and eligible businesses may retroactively apply using IRS Form 941-X.

Key takeaways

• The deadline for all 2020 filings is April 15, 2024. On average, 2020 quarters make up a total of 20% of the eligible credit dollars available to small businesses and 30% of the ERC credit amount small businesses qualify for.

• Applying and filing for the ERC takes time. If you are applying for ERC and you want to beat the deadline we recommend you apply by February 15, 2024, to allow ample processing time. (While we can often get your credit processed much quicker than this, some accounts require extra due diligence and back and forth).

• To reserve your spot in line with the IRS your business must have all revised payroll tax forms for 2020 quarters postmarked and in the mail to the IRS prior to April 15, 2024.

• The filing deadline for all 2021 filings is April 15, 2025.

Employee Retention Credit deadlines.

The ERC is not available for tax years 2024 and beyond, but you can retroactively apply if you haven't yet taken advantage of this credit. Businesses could receive a credit of up to $5,000 per employee in 2020 and $7,000 per employee per quarter in 2021. So it's definitely worth paying close attention to the deadlines to make sure you don't miss out on this opportunity to significantly lower your tax bill.

Each tax year has its specific deadline. This gives you time to focus on one application at a time since each tax year requires its own form to support the different eligibility requirements. 

ERC deadline for the 2020 tax year.

The Employee Retention Credit deadline for the 2020 tax year is April 15, 2024. This applies to all three eligible quarters: Q2, Q3, and Q4. The first quarter doesn't count since COVID-19 mandates didn't begin in the U.S. until the end of the first quarter. 

ERC deadline for the 2021 tax year.

The ERC deadline for Q1, Q2 and Q3 for the 2021 tax year is April 15, 2025. This gives you time to gather documentation for a robust application. But it's still smart to apply as soon as possible, especially since the IRS is reporting a backlog in reviewing applications. In other words, the sooner you apply, the sooner you're likely to get approved and receive your credit funds (or have them applied to an outstanding tax bill).

Overview of ERC eligibility.

Before applying for the Employee Retention Credit, make sure your business qualifies for 2020, 2021, or both. The basic eligibility criteria vary from year to year.

For the 2020 tax year:

• No more than 100 employees
• A government mandate prevented operations, either in hours or service capacity, OR revenue was less than 50% of 2019 gross receipts

For the 2021 tax year:

• Fewer than 500 employees
• A government mandate prevented operations, either in hours or service capacity, OR revenue was less than 80% of 2019 gross receipts

Newer businesses may also qualify for the ERC as a recovery startup business. In order to qualify, your business must meet the following requirements:

• Began after February 15, 2020
• Annual gross receipts under $1 million
• One or more W2 employees 

How to apply for the ERC.

Lendio is here to assist small businesses with their ERC applications. We can help you quickly streamline your application with a step-by-step guided form that removes all the guesswork from the process. In fact, to date, our tax partners have helped Lendio clients collect over $300 million from the ERC program.

One luxury of being an employee is that you don’t have to worry much about tax planning. 

You can sit back as your employer withholds money from your paycheck to cover your liabilities, then use the details from your W-2 to file your tax return come tax time.

As a self-employed individual, you don’t have that privilege, and your tax situation becomes a lot more complex. Fortunately, that complexity has a silver lining. You gain a wide range of tax deductions that can significantly reduce your personal income tax.

In fact, you can deduct all ordinary and necessary business expenses. If you’re not sure what those look like, here are some of the most popular tax write-offs for self-employed people.

Top tax write-offs for the self-employed.

1. Self-employment taxes

2. Retirement plan contributions

3. Qualified business income

4. Home office expenses

5. Business rent

6. Office supplies

7. Depreciation

8. Internet and phone bills

9. Health insurance deduction

10. Business insurance premiums

11. Business meals

12. Business travel

13. Business vehicle expenses

14. Interest on business debts

15. Advertising expenses

16. Professional services

17. Continuing education costs

18. Professional dues

18 Tax Write-Offs

1. Self-employment taxes

Let’s start with a tax break you can take advantage of regardless of your business model: self-employment taxes.

The self-employment tax refers to the Social Security and Medicare taxes you have to pay on 92.35% of your net earnings from your business. These are separate from the federal and state taxes everyone has to pay on their income.

When you’re an employee, you get to split Social Security and Medicare taxes with your employer. For the year 2021, each party pays 7.65%.

Unfortunately, self-employed taxpayers are responsible for both the employer and employee portions. As a result, they owe a combined 15.3% tax, of which 12.4% is for the Social Security tax, and 2.9% goes to Medicare.

To lessen that blow, the Internal Revenue Service (IRS) lets you deduct the employer portion from your income when you calculate your federal and state income tax liabilities.

For example, imagine you generate $100,000 in net earnings as a sole proprietor. 92.35% of your net earnings multiplied by 15.3% equals $14,130 in self-employment taxes.

However, you’d get to deduct half of that expense, $7,065, for income tax purposes. In other words, you’d pay federal and state income taxes on $92,935 of net earnings rather than $100,000.

2. Retirement plan contributions

Whatever your employment status, contributing to retirement plans is one of the best ways to pay less in taxes. Not only does it directly reduce your adjusted gross income in the current tax year, but it also defers taxes on all your earnings within the account.

That said, self-employed people can access some uniquely powerful retirement accounts that employees can’t. For example, if you’re an independent contractor with no employees, you can open up and contribute to a Solo 401(k).

Solo 401(k)s are similar to their employer-sponsored counterparts, but the contribution limits are significantly higher. Here’s how they work:

• Employees: You can contribute up to $19,500 in 2021 and $20,500 in 2022. If you’re over 50, you can also make a catch-up contribution of $6,500. Your employer can put more in the account, but you have no control over that.
• Self-employed: In addition to the standard employee contribution, you can put in 25% of your net self-employment income up to a whopping $38,500 in 2021 and $40,500 in 2022 as your “employer” contribution.

Because retirement contributions are discretionary, you can dial them up and down as necessary to manipulate your taxable income. That’s a huge advantage, especially when your earnings fluctuate from year to year.

3. Qualified business income

The qualified business income (QBI) deduction is one of the newer tax write-offs for self-employed people. If you think you might be eligible, it’s definitely a good idea to consult a CPA for guidance.

In simple terms, the QBI deduction lets you write off 20% of the income you generate from your business operations. To be eligible, you must meet the following requirements:

Legal entity structure: Only people with pass-through income are eligible for QBI. That refers to sole proprietorships, partnerships, limited liability companies, and S-Corporations. C-Corporations can’t claim the deduction.

Income limitations: For single filers, your taxable income must be less than $164,900 in 2021 and $170,050 in 2022.

Business model: If your income is above the threshold, the type of business you run determines how much you can deduct. If you’re a “specified service trade or business”, the deduction phases out the more you earn.

Once again, claiming the QBI deduction is a complex process. There are many nuanced rules and lengthy calculations involved, so don’t try to tackle it without the help of a tax expert.

4. Home office expenses

If you do business out of your personal residence instead of a separate office, you may be eligible to deduct some of the expenses you incur to maintain your home. That includes costs like rent, mortgage interest, utilities, and maintenance.

In general, you can write off the portion of your housing expenses that corresponds with the part of your home that you use regularly and exclusively for your business. You don’t qualify for the deduction if you fail to meet either of those requirements.

In other words, you must have a dedicated home office space where you do most of your business. If you spend more time working at coffee shops than your home office, or if it doubles as a dining room table, you can’t take the write-off.

If you’re eligible, there are two ways to calculate your home office deduction:

Standard: This method involves tracking all of your home expenses and multiplying them by the percentage of your residence dedicated to your home office.

Simplified: If you don’t want to take the time to track all your housing expenses, you can multiply the square footage of your home office (up to 300 square feet) by $5 and deduct that.

Whenever there are two methods to determine the size of a deduction, it’s a good idea to calculate both and take the larger of the two. That said, the standard method often leads to higher tax deductions in this case.

5. Business rent

Renting an office or storefront is one of the most significant business expenses you’re likely to incur. Fortunately, if it’s reasonable that someone in your line of work would need the space, you can write off the cost of the lease.

For example, if you work from a computer, it’s logical that you’d need office space. Likewise, if you own a fitness gym, it makes sense that you’d need a location for people to exercise. In both scenarios, your rent would be deductible.

You can also deduct any rent you pay for equipment that’s necessary for your business operations. For example, if you run a home repair business, you could write off any rent you pay for the tools you use to complete a job.

6. Office supplies

Office supplies are a relatively standard deduction for self-employed people. It includes the minor materials you need to keep your business going. For example, you can write off items like paper, staplers, pens, and printer ink if your company uses them.

7. Depreciation

When you buy property or equipment for your business, the IRS might not let you deduct the expense all at once. Instead, you often need to depreciate these assets over their useful lives, which can be anywhere from a few years to several decades.

Depreciation represents the steady decrease in the value of an asset over time. For example, say you’re a real estate investor. When you buy an apartment complex, you take depreciation as the paint erodes, the floors degrade, and the roof deteriorates.

In general, you’ll need to depreciate assets worth more than $2,500. An IRS safe harbor rule means they won’t call you out if you write off something immediately when you pay less than $2,500, assuming it’s a legitimate business expense.

The rules for deducting depreciation can get surprisingly complicated. There are multiple ways to calculate the amount. If you’re eligible, it’s a good idea to consult a CPA for assistance.

8. Internet and phone bills

You can generally write off the portion of your internet and phone costs that correspond with your business use. If you have a separate business office with its own wifi and telephone, everything you pay for these services is deductible. 

However, if you operate out of a home office, calculating the write-off becomes a lot more complicated. The concept is similar to the home office deduction. You’ll need to determine which portion of your usage is for business and personal purposes.

9. Health insurance deduction

The cost of health insurance in the United States is staggering, so health insurance premiums are another hugely beneficial tax write-off for self-employed people. It can help make up for your lack of an employer to subsidize your medical expenses.

As long as you’re not eligible for coverage through a spouse’s employer, you can generally deduct all of the premiums you pay for your and your family’s health, dental, and long-term care insurance.

10. Business insurance premiums

Depending on your business model, you may want or need to purchase some form of business insurance. Fortunately, the premiums you pay for these policies are tax-deductible, as long as there’s a need for them in your line of work.

For example, medical service providers must maintain malpractice insurance, a form of professional liability insurance that protects them against lawsuits over mistakes that harm their patients.

Some other popular forms of business insurance that may be tax-deductible include general liability insurance, commercial property insurance, business income insurance, and workers’ compensation insurance.

11. Business meals

Though you have to tread a fine line, business meals can be tax-deductible in some circumstances. However, the rules are a bit tricky, and you can bet that the IRS watches these deductions closely. It may be worth consulting a CPA for help with this write-off.

In general, you can only deduct 50% of the cost of business-related food and drink from your taxes. For example, that includes:

• Meals while traveling for business
• Catering during meetings with employees
• Meals while discussing business with prospective clients

Unfortunately, lunch at the office by yourself doesn’t qualify. You must actively pursue or discuss business matters with others during the meal. It’s a good idea to keep detailed records of these matters.

There are two ways to calculate a meals deduction. First, you can deduct half the actual cost, in which case a reasonableness test applies. Alternatively, you can take a standard allowance, which the General Services Administration sets.

For tax years 2021 and 2022, the 50% limitation has been temporarily lifted. You can deduct 100% of eligible business meals as long as they come from a restaurant. The change is an attempt to stimulate the restaurant industry after COVID-19.

12. Business travel

If your business requires that you travel, you can deduct the costs you incur to get you to your destination and for lodging while you’re away from home. Maybe you need to tour a potential rental property or meet with a client out of state.

Unfortunately, taking a deduction for business travel can be tricky. As you might expect, there’s a lot of opportunity for abuse with travel write-offs. The IRS won’t be happy if you try to deduct the cost of your family vacation to Orlando. 

Even if you go to Orlando for legitimate business reasons, they’re also savvy enough to know that you might stick around for a few extra days for personal reasons.

However, like every other expense, travel is only deductible when it’s ordinary and necessary for your business. That means the extra night you spent in a hotel to see the Magic Kingdom is not tax-deductible.

13. Business vehicle expenses

If a vehicle is necessary for some aspect of your operation, you can write off the expenses associated with your business usage. For example, a real estate agent could deduct the use of their vehicle to meet clients at potential properties.

Unfortunately, you can’t take a deduction for commuting to your primary place of work. For example, you can’t consider the trip from your house to your office space a business expense.

If you’re going to take this deduction, there are two ways to calculate the amount:

Actual expense method: Keep detailed records of all your car expenses, including auto insurance, gas, and maintenance, then multiply that amount by the percentage of your driving that was business-related.

Standard mileage method: Keep track of the total number of miles you drove for business purposes, then multiply it by the IRS standard mileage rate. It’s $0.56 in 2021 and $0.585 per mile in 2022.

Unfortunately, you can’t bounce back and forth between the two. If you start with the standard method, you can decide to switch to the actual expense method, but you won’t be able to go back until you get a new business vehicle.

14. Interest on business debts

The interest you pay for your business debts can be another significant deduction for self-employed people. Whether you take out installment or revolving debt accounts, you can write off any interest that accrues on the balances for business expenses.

For example, if you finance the purchase of business equipment, the interest portion of your monthly payments is tax-deductible. Similarly, if you use a business credit card to buy supplies and carry a balance over, you can deduct the interest when you pay it off.

In theory, it’s possible to split funds from a credit account between business and personal use. In that case, only the interest on the business portion is tax-deductible.

15. Advertising expenses

When you’re self-employed, you have to get your business in front of potential clients. Fortunately, you can take a tax deduction for the various expenses you incur to promote yourself. That means you can write off the cost of things like the following:

• Social media ads on sites like Facebook and Instagram
• Pay-per-click campaigns on search engines
• Local billboards and print media materials

In addition, while not strictly an advertising expense, you can deduct the cost of maintaining a website for your business. For example, that might include the price of the domain and the fees you pay to a copywriter or web designer.

16. Professional services

As a small business owner, you often have to wear many hats. In your early years, you may find yourself handling administrative, bookkeeping, marketing, tax planning, and customer service duties on top of your day-to-day business operations.

However, once you have more traction, you can afford to outsource those functions. Fortunately, you can take a tax write-off for the fees you pay to the various professional service providers who handle them for you.

For example, if you’re tired of doing your own accounting, you can hire an independent specialist to maintain your books, build your financial statements, and file your taxes. Whatever they charge for their services will be a tax write-off.

17. Continuing education costs

Continuing education costs are an often underutilized tax write-off for the self-employed. In general, you can take a deduction whenever you pay to improve the skills necessary for your current business. That might include the cost of:

• A course written by a fellow professional in your field
• Required education to maintain a professional license in your trade
• A series of lectures on modern marketing strategies for small businesses

It’s important to emphasize that you can’t take a tax deduction for educational costs that don’t relate to the business you’re already operating. For instance, a freelance writer couldn’t take a deduction for a seminar on wedding photography.

18. Professional dues

Last but not least, you can take a tax deduction for the dues you pay to maintain a professional license or membership in a professional organization. This is a popular write-off for technical service providers, such as accountants, lawyers, and doctors.

However, you can’t deduct any old organizational or licensing fees. They have to be relevant to your profession. For example, a lawyer could deduct their annual membership dues paid to their State Bar.

Unfortunately, the deduction doesn’t let you claim dues to any club with a social purpose, even if you do business there. For example, you can never write off country club dues, even if you consider it a place to network. 

Many accounting classes start with the “lemonade stand” model of business management. You want to sell lemonade, so you work through the process of buying supplies and selling products.

However, running a business becomes more complicated when you leave the private sector to start a nonprofit. Instead of selling lemonade, you’re now trying to collect funds so others can have lemonade. Or you’re selling lemonade to donate funds. 

Nonprofits have their own accounting challenges and requirements, with specific documentation and legal guidelines for what they can accept and what they can do with their money. However, despite their complexity, the basic principles of accounting shine through. Nonprofits with clear records and organized financial categories have better odds of succeeding and bringing positive influence to whatever cause they support.

Learn more about nonprofit bookkeeping and its accounting process to better position your charity to apply for grants, win over big-money donors, and drive change.

What is nonprofit accounting?

Nonprofit accounting—also referred to as fund accounting—is a unique form of bookkeeping designed specifically for nonprofit organizations. Unlike profit-driven businesses, nonprofits aren't primarily focused on increasing wealth for shareholders. Instead, they're driven by a mission to serve a specific societal need, and their accounting practices reflect this difference.

Nonprofit accounting involves tracking donations, grants, and other forms of income, as well as ensuring these funds are used appropriately and efficiently towards the organization's mission. This form of accounting places a significant emphasis on transparency, accountability, and stewardship, making sure every dollar is accounted for and used responsibly.

Moreover, nonprofit accounting is regulated by a distinct set of legal and financial standards that require detailed reporting and compliance. Understanding these requirements is integral to the management and operation of any successful nonprofit organization.

How is nonprofit accounting different from for-profit accounting?

There are several key differences between nonprofit and for-profit accounting, primarily stemming from the distinct goals and operational structures of these two types of organizations. For-profit businesses aim to generate profits and increase shareholder value, whereas nonprofits exist to serve a specific social purpose and are tasked with demonstrating how they use their funds to further this mission.

In for-profit accounting, the focus is on revenues, expenses, and the resulting profits, with financial statements like the balance sheet and income statement detailing the company's financial health. On the other hand, nonprofit accounting centers around tracking and reporting on the use of funds, where financial statements such as the statement of financial position and statement of activities provide a transparent view of the organization's financial situation.

Moreover, nonprofits are held to a high degree of fiscal accountability and stewardship, requiring them to thoroughly document all income and expenditures. They are also subject to specific regulatory and reporting requirements, including filings like the IRS Form 990, which are not applicable to for-profit entities. These differences underscore the importance of understanding and effectively managing nonprofit accounting—it's not just about keeping the books, but ensuring the organization is taking the right steps towards fulfilling its mission.

How to navigate nonprofit accounting.

Navigating the world of nonprofit accounting can seem like a daunting task, with its unique regulatory guidelines, strict requirements for transparency, and the constant need for fiscal accountability. However, with the right knowledge and tools, it can be effectively managed to uphold your organization's mission and sustain its operations with confidence and ease.

Identify cash flow sources.

As your nonprofit grows, you may have multiple cash flow sources. Each source of income requires different levels of effort and spending. 

However, you’re responsible for tracking every dollar your nonprofit receives—and accounting for what you do with it. A few common examples of income sources for nonprofits include:

• Cash donations from benefactors and supporters
• Local, state, and federal grants
• Legacy gifts from donors who passed away
• Fundraising partnerships from local businesses 
• Ticket sales to events and your donor-facing locations

For example, an art museum or animal rehabilitation group can sell tickets to the general public. The art museum might also sell tickets for fundraising galas and summer camp activities for kids. Meanwhile, the animal rehabilitation center can fundraise through events like goat yoga, with the proceeds supporting the food and medication needed for their animals. 

Not every nonprofit has a donor-facing experience, however. Many homeless shelters and child advocacy groups rely instead on grants and donations from benefactors and businesses. While every nonprofit is different, most charities rely on individual donations to stay open. It’s estimated that over 80% of income for nonprofits comes from individual giving.  

Whenever you propose a new fundraising opportunity or activity, consider which category the development efforts fall under. This may determine how you can spend the money and the target ROI expected for your efforts. 

Quantify in-kind donations.

Beyond money, there’s a whole different kind of donation that nonprofit organizations need to track and build into their budgets. In-kind donations refer to gifts that aren’t monetary but have a monetary value. A few examples of in-kind donations include:

• A local restaurant donating a $100 gift card for part of a charity auction
• A marketing agency offering its services pro bono on a monthly retainer basis 
• Local high school students collecting soup cans or coats from their peers to donate 
• A few retired volunteers spending a couple of hours each week filing paperwork and performing other administrative tasks 

Each of these in-kind donations is specific and has value, but how can you track them in your accounting systems—and why do you need to?  

There are 2 main reasons why you need to track your in-kind donations. First, you’re required to for tax reporting purposes. In some cases, businesses and individuals can claim charitable donations on their taxes to receive deductions. The in-kind donation that a business provides might be part of its core values, but the company also wants a tax break. 

Next, you need to identify the sources of income and value to your business. For example, if a volunteer helps with administrative tasks for an average of 15 hours per week, they provide real monetary value to your business. If they suddenly stopped volunteering, how much would it cost to hire a temporary worker or part-time employee for those 15 hours of work? An administrative assistant earning $15 per hour for 15 hours per week over a year (50 weeks) earns $11,250. Just because that volunteer doesn’t give you cash doesn’t mean they aren’t one of your largest donors.  

Any person who donates time to your organization provides value and income. By tracking volunteer hours and activities (whether they offer highly skilled IT support or low-skilled help), you can estimate the cost savings to your organization.

Once you quantify your in-kind donations, set up a system to accept and process them. You’ll need to report on your in-kind support and volunteer hours at the end of each year, both in your annual report and in your budgeting meetings. Each donor also needs to receive a thank you letter that explicitly details what they gave and its monetary value. This record is used for their tax purposes.

Choose between cash- vs. accrual-based accounting.

As you develop the financial policies and procedures of your nonprofit, you need to consider whether you will use cash- vs. accrual-based accounting. Every business has to choose between these 2 accounting models—and keep in mind that it isn’t easy to switch from one to the other.

Cash-based accounting means that you only record income when you receive it and expenses when you pay for them. For example, you would record a donation from a benefactor once their check hits your account. 

The main benefit of cash-based accounting is that you always know what kind of money you have. There is less risk of overspending because you aren’t focused on future income that may or may not come. However, this format can make it hard to forecast upcoming expenses and future donations.

With accrual-based accounting, you record any income or expenses when they’re earned, not received. For example, if you call a plumber to fix your organization’s toilet, you will record the cost of the repair when the plumber completes the job—even if you don’t pay the invoice for another few weeks. 

Accrual-based accounting is viewed as more comprehensive than cash-based models. Nonprofits can understand more clearly the money they currently owe and will soon receive. 

So which model is best? In the nonprofit sector, most organizations use accrual-based systems. Yes, this process is more complex and time-consuming, but the system is believed to be more accurate and comprehensive.

In fact, some nonprofit types are legally required to use accrual-based reporting—for example, if you receive grants or have paid staff. This promotes financial transparency to organizational partners.

If you have a cash-based accounting system, you will need to create a disclaimer in your financial reports and year-end statements illustrating this and potentially explaining why.

Track the ROI of your fundraising efforts.

Nonprofit accounting doesn’t just provide transparency to donors and governing bodies—it also shines a spotlight on the efforts the organization works toward.

Over the past few years, there have been increased calls for nonprofits to serve as good stewards of the money they receive. Charity Navigator ranks nonprofits based on their transparency and their financial stewardship. If an organization mishandles money (e.g., through overinflated executive pay, overspending, and donation mismanagement), then donors are discouraged from contributing. 

Every nonprofit has its own operating costs and financial challenges. However, the team at Charity Watch estimates that a responsible expense ratio is 35% or less. For every $100 you bring into your organization, it is reasonable to spend $35 to solicit the donation. Other nonprofits shoot for a 25% expense ratio or a 4:1 ROI. 

Through your accounting processes, you should be able to track how much it costs each year to bring in donations to your organization. These expenses range from hiring a full-time donor coordinator to hosting fundraising events and galas each season.

Additionally, you should be able to track what percent of your total donations actually support your nonprofit’s mission—which reflects your stewardship and respect for donors. 

These analyses can be performed on both a macro and micro level. While maintaining a high ROI for your fundraising efforts is important for your charity’s reputation, you may decide to prioritize some development efforts over others if they bring in higher donation amounts or cost less to implement. (If you come from the private sector, this is similar to adjusting your products to promote items with a higher gross margin.)

Know important nonprofit accounting documents.

Nonprofit accounting requires meticulous maintenance and management of numerous financial documents for transparency and compliance purposes. Here are several key documents that are integral to nonprofit accounting:

1. Nonprofit budget - This vital financial document outlines the organization's expected income and expenses for a certain period of time, typically a fiscal year. It serves as a roadmap for spending and revenue generation, playing a crucial role in guiding strategic decision-making and ensuring financial sustainability. Some things to remember when creating your budget include identifying your cash flow sources and quantifying in-kind donations.
2. Statement of financial position (SOP) - This document is the nonprofit equivalent of a balance sheet. It provides a snapshot of the organization's financial condition at a specific point in time, summarizing its assets, liabilities, and net assets. The assets are listed from most to least liquid—what could be spent the fastest—while the liabilities are listed in order of obligation. This document provides a high-level overview of the company’s finances and priorities.
3. Statement of activities - Analogous to an income statement in for-profit businesses, this document details revenue, expenses, and changes in net assets over a given period. It provides a clear picture of how funds are being sourced and utilized.
4. Statement of cash flows - This is a detailed record of the cash inflows and outflows experienced by the organization during a particular period, illustrating the liquidity and financial viability of the organization.
5. Statement of functional expenses - This statement provides a breakdown of expenses by both nature (what was purchased) and function (why it was purchased). It is unique to nonprofits and helps demonstrate how funds are allocated between program services and supporting activities.
6. IRS Form 990 - This is an annual reporting return that certain federally tax-exempt organizations must file with the IRS. It provides information on the filing organization's mission, programs, and finances.

Understanding and accurately maintaining these financial documents is crucial in nonprofit accounting, as they provide a comprehensive and transparent record of the organization's financial activities, ensuring compliance with regulatory requirements and fostering trust with donors, members, and the public.

Develop a clear operations budget.

Accounting serves two major purposes in business: looking back on past performance and planning for future income. While your nonprofit may use financial documents to report on the past quarter, you can also use this visibility to create fundraising goals and budget for future expenses.

For example, a nonprofit can review its operational expenses to predict how much it costs to run annually. The organization can then use this information to make cuts or take on new projects depending on whether they have a cash deficit or surplus.

On top of tracking operating expenses (OPEX), nonprofits often set goals to help the community and make an impact. These efforts come with their own version of cost of goods sold (COGS).

For example, if a nonprofit offers a mobile shower, shave, and haircut service to homeless individuals, the COGS required to offer that service might include towels, soap, the cost of hiring barbers, and care package items to give to those in need. A nonprofit that has a goal to offer 3,000 showers over the course of the year will have to budget for those items. 

The challenge for nonprofits: the funds for these operating expenses aren’t always guaranteed. Development teams will review the operational goals for the year and set fundraising goals to bring in more money so the organization can expand its efforts. 

While both the fundraising team and operations department might be on the same page during the year, both parties should meet quarterly to review their current finances to see if operations can get scaled up—or if they need to be pulled back. This is how a nonprofit balances its budget.

Set up a reporting system.

The world of finance and accounting can be stressful, especially for those who worry about recording every receipt and tracking numbers accurately—and there is some truth to this concern. If you let your sales receipts and donations pile up without recording them, then your accounting process will become beleaguered. You even risk creating inaccurate documents and making decisions based on outdated information because your books aren’t organized. 

The easiest way to prevent this backlog of unrecorded transactions is to set up a system where you can record income and expenses quickly. Invest in software tools that let you categorize costs and even auto-categorize repeating charges.

Train your team members to reconcile their expenses immediately and report any new donations. By spending a few minutes each day reviewing your transactions, you can keep up with your finances and prevent the dreaded backlog.  

Prepare to file taxes and submit annual reports.

All of your financial documents and accounting processes will help your nonprofit at the end of the year. Nonprofits still need to file taxes, even if they are tax-exempt (tax-exempt doesn’t mean you can skip filing, just that you won’t have to pay taxes).

One of the most important tax documents for a nonprofit is Form 990. This form covers the nonprofit’s mission, programs, and finances. There are multiple types of Form 990, with fields that vary based on your organization’s size and operations. For example:

• Nonprofits with less than $50,000 in gross receipts can fill out Form 990-N, an e-Postcard.  
• Nonprofits with more than $50,000 in gross receipts can fill out Form 990 or 990-EZ.
• Private foundations fill out form 990-PF. 

Some organizations are exempt from filling out Form 990. These include faith-based groups, government cooperatives, and subsidiaries of other nonprofits. 

Along with your taxes, your organization may need to submit an annual report to the state or federal government. These reports are typically made public each year by nonprofits and live on their websites for potential donors to access.

Use your nonprofit accounting system as a marketing tool.

Nonprofits are constantly fighting to win over new donors and prove they deserve support. As your accounting system falls into place, promote it within your development materials to show donors that you care about the money they give. 

• Highlight your target ROI and the steps you are taking to improve it.
• Share your impact goals for the year and the operating budget you need to hit them.
• Explain what your general fund does and why funding expenses like toilet paper and rent are important. 
• Showcase your stewardship and transparency to prove you respect their donations. 

You can’t talk about these aspects of your organization without clear proof. This proof comes in the form of financial documents and statistics highlighting your accounting efforts. You work so hard to serve your community and handle their money responsibly—it’s time you started bragging about it.

Create processes to manage your nonprofit accounts.

Establishing streamlined processes to manage your nonprofit accounts is essential for efficient and transparent operations. Begin by implementing a system that caters to your unique needs and ensures accurate record keeping. Regularly review your accounts to ensure compliance with regulations and maintain up-to-date records.

Opt for cloud-based accounting software tailored for nonprofits, as they can automate many tasks, improve accuracy, and save time. This includes generating financial reports, tracking donations, managing expenses, and even budgeting.

Develop an internal policy outlining how financial transactions should be handled, including approval processes for expenditures and proper documentation for all transactions. This can play a vital role in preventing misappropriation of funds and ensuring financial integrity.

Training staff and volunteers on the importance of financial management is crucial. Everyone involved should understand their role in maintaining the financial health of the organization. Regular training sessions can keep everyone up-to-date on best practices and changes in financial regulations.

By creating solid processes, you can manage your nonprofit accounts effectively, maintaining the trust of your donors, and ensuring the longevity of your organization.

Nonprofit accounting best practices.

Implementing best practices in nonprofit accounting can enhance your organization's operational efficiency, financial transparency, and overall accountability. Here are some key strategies to consider:

1. Implement robust internal controls - Internal controls are essential for safeguarding your organization's assets, ensuring the accuracy of your financial records, and preventing fraud. These can include separation of financial responsibilities to prevent a single person from handling all financial tasks, regular audits, and comprehensive financial policies and procedures.
2. Use nonprofit accounting software - Specialized nonprofit accounting software can simplify complex fund accounting, making it easier to track and report on different sources of income, categorize expenses, and ensure compliance with nonprofit-specific standards and regulations.
3. Regularly review financial reports - Regular reviews of your financial statements can help identify trends, foresee potential issues, and make informed, strategic decisions. This includes closely examining your statement of financial position, statement of activities, statement of cash flows, and statement of functional expenses.
4. Maintain a reserve fund - Having a reserve fund can provide financial stability in times of unexpected expenses or drops in funding. It also demonstrates to donors and stakeholders that your organization is financially responsible and prepared for unforeseen circumstances.
5. Provide transparency - Nonprofits are held to high standards of accountability. Regularly share your financial reports with board members, stakeholders, and the public to maintain trust and demonstrate responsible stewardship of funds.
6. Invest in financial training for non-finance staff - Everyone in your organization should have a basic understanding of your nonprofit's finances. Providing training can help staff understand the importance of their role in maintaining financial integrity and how their day-to-day actions impact the organization's overall financial health.
7. Stay current with regulations - As regulations and standards can update, it's important to regularly check in with the regulatory bodies or consult with an accounting professional to avoid non-compliance.
8. Plan overhead expenses carefully - Nonprofits, like any other organization, will have overhead costs, such as administrative expenses, salaries, utilities, and office supplies. It's important to budget and monitor these expenses carefully as they play a direct role in your organization's sustainability and efficiency. A well-planned overhead expense strategy ensures that the maximum amount of funding goes directly to your cause, enhancing trust among your donors and stakeholders.
9. Reference your budget often - Regularly referring back to your budget is key to maintaining financial discipline and ensuring the organization stays on track with its financial goals. This practice encourages proactive adjustments to spending habits and allows for timely reallocation of resources, if necessary, to meet the changing needs and priorities of the organization.

By following these best practices, your nonprofit can maintain strong financial health and continue effectively serving your mission.

Implementing best practices in nonprofit accounting can enhance your organization's operational efficiency, financial transparency, and overall accountability. Here are some key strategies to consider:

1. Implement robust internal controls - Internal controls are essential for safeguarding your organization's assets, ensuring the accuracy of your financial records, and preventing fraud. These can include separation of financial responsibilities to prevent a single person from handling all financial tasks, regular audits, and comprehensive financial policies and procedures.
2. Use nonprofit accounting software - Specialized nonprofit accounting software can simplify complex fund accounting, making it easier to track and report on different sources of income, categorize expenses, and ensure compliance with nonprofit-specific standards and regulations.
3. Regularly review financial reports - Regular reviews of your financial statements can help identify trends, foresee potential issues, and make informed, strategic decisions. This includes closely examining your statement of financial position, statement of activities, statement of cash flows, and statement of functional expenses.
4. Maintain a reserve fund - Having a reserve fund can provide financial stability in times of unexpected expenses or drops in funding. It also demonstrates to donors and stakeholders that your organization is financially responsible and prepared for unforeseen circumstances.
5. Provide transparency - Nonprofits are held to high standards of accountability. Regularly share your financial reports with board members, stakeholders, and the public to maintain trust and demonstrate responsible stewardship of funds.
6. Invest in financial training for non-finance staff - Everyone in your organization should have a basic understanding of your nonprofit's finances. Providing training can help staff understand the importance of their role in maintaining financial integrity and how their day-to-day actions impact the organization's overall financial health.
7. Stay current with regulations - As regulations and standards can update, it's important to regularly check in with the regulatory bodies or consult with an accounting professional to avoid non-compliance.
8. Plan overhead expenses carefully - Nonprofits, like any other organization, will have overhead costs, such as administrative expenses, salaries, utilities, and office supplies. It's important to budget and monitor these expenses carefully as they play a direct role in your organization's sustainability and efficiency. A well-planned overhead expense strategy ensures that the maximum amount of funding goes directly to your cause, enhancing trust among your donors and stakeholders.
9. Reference your budget often - Regularly referring back to your budget is key to maintaining financial discipline and ensuring the organization stays on track with its financial goals. This practice encourages proactive adjustments to spending habits and allows for timely reallocation of resources, if necessary, to meet the changing needs and priorities of the organization.

By following these best practices, your nonprofit can maintain strong financial health and continue effectively serving your mission.

Effective accounting is the backbone of any nonprofit's success. It not only ensures financial transparency and accountability, but also enables strategic planning for future growth.

By leveraging modern tools, establishing robust processes, and continually educating team members, a nonprofit can effectively manage its finances. As a result, it can prove its fiscal responsibility to its donors and governing bodies, ultimately helping to sustain its operations and further its mission. Remember, accounting is not just about crunching numbers—it's about telling a story of your nonprofit's stewardship, impact, and commitment to its cause.

Real estate agents deal with hundreds of tasks throughout the property buying and selling process. They have costs to market themselves, improve properties, pay a variety of fees, and split the commission.

By the time a property closes, there are dozens of transactions related to the realtor and their clients. This can be an accounting nightmare if you don’t have a clear system in place. 

Fortunately, you don’t need an accounting background to be successful in real estate—but you should have a general understanding to help you make the best strategic decisions for your real estate business.

Keep reading to learn more about real estate accounting. Even if you’re just starting out, you can create processes that help you to scale—and to keep as much commission as you can.

What is real estate accounting?

Real estate accounting is a specialized branch of accounting that focuses on managing the financial transactions related to a real estate business. This includes tracking income from property sales or rentals, expenses such as maintenance costs, commission payouts, and property improvements, and any other transactions related to real estate activities. 

A comprehensive real estate accounting system not only ensures compliance with tax and financial regulations, but also helps realtors make informed decisions to improve their profitability and growth. Whether you're a solo agent, a property manager, or a large real estate firm, understanding the basics of real estate accounting is integral to your financial success.

Why real estate accounting is important.

Understanding the importance of real estate accounting is crucial if you want to maintain financial health and propel your business forward. It not only helps track performance, but also aids in strategic planning and decision-making.

• Transparency - Real estate accounting gives a clear and transparent view of your financial situation, allowing you to understand your income, expenses, and profitability at a glance.
• Compliance - Real estate accounting ensures compliance with tax laws and financial regulations, preventing you from facing penalties or legal issues.
• Decision making - Real estate accounting aids in strategic decision making by providing vital financial data, facilitating operational improvements and expansion plans.
• Cash flow management - Real estate accounting helps in effective cash flow management, which is critical for the smooth operation of any real estate business.
• Cost management - With proper real estate accounting, you can identify areas of excessive spending and implement cost-saving measures.
• Investor confidence - Accurate and up-to-date accounting can increase investor confidence, which can be crucial if you're seeking external funding or partnerships.
• Profit maximization - Real estate accounting enables you to track and control your expenses, allowing for better budgeting and ultimately maximizing your profits.

Real estate accounting is an invaluable tool for anyone involved in the real estate industry. Its ability to provide a clear financial picture facilitates strategic planning, regulatory compliance, and ultimately, business growth. Ignoring its importance can lead to disorganization, legal issues, and missed opportunities for profit maximization.

Elements of real estate accounting.

Real estate accounting comprises several key elements that work together to provide a full picture of your business’ financial health.

1. Revenue tracking - This includes all income generated from property sales, rentals, or other services offered. It's crucial to accurately record all revenue transactions to have a clear view of your business’ profitability.
2. Expense management - These are costs incurred in the running of the business. They include maintenance costs, commission payouts, marketing expenses, and property improvements. Proper management of expenses helps to identify areas where costs can be reduced to increase profitability.
3. Financial reporting - Regular financial reports help realtors monitor the business’ financial performance over a specific period. These reports include profit and loss statements, balance sheets, and cash flow statements.
4. Tax preparation - A substantial part of real estate accounting involves managing tax-related matters. This includes determining taxable income, identifying tax deductions, and ensuring timely tax payments to avoid penalties.
5. Budgeting and forecasting - This involves making financial projections for the future, based on past and current financial data. Budgeting and forecasting are essential for strategic planning and decision-making.

Understanding these elements of real estate accounting can help you navigate the financial landscape of your business, ensuring that you are making informed decisions to drive growth and profitability.

Real estate accounting basic steps.

The financial backbone of a real estate business revolves around effective accounting practices. These practices maintain the flow of funds, enabling the business to thrive even in fluctuating markets. Even though real estate accounting might seem intricate, a clear understanding of the basic steps can simplify the process dramatically. 

Let's delve into the core steps of real estate accounting that can effectively manage your financial transactions and provide a clear picture of your business' financial health, regardless of the size of your real estate portfolio.

1. Choose an accounting method.

You can choose between cash-based and accrual-based accounting to track your expenses and income. 

With cash-based accounting, you record income only when the cash hits your account. You also only record expenses when your business is billed for them. With this model, you can see clearly how much money you have within your organization.

With accrual-based accounting, you record income and expenses when they occur, not when money exchanges hands. For example, you can record the costs to stage a home, even if you don’t pay the stager until the following month. Accrual-based accounting is a better option if you want more visibility into the finances of your business, including future expenses and revenue streams. 

However, many realtors prefer to use cash-based accounting for their firms. First, most expenses related to real estate are immediate. If you need to hire a photographer, you can cut a check for their services or request an invoice immediately. Because there isn’t a delay between the service and payment, the cash-based model works. 

Many realtors also prefer the cash model because of their income sources. Sales fall through, contracts are renegotiated, and renters cancel their leases. All of these changes can harm your cash flow, especially if you already recorded the income through your accrual-based system. With a cash model, you can record the income when the sale closes or when the renter’s check hits your account. The payment is a sure thing—and the money is yours to spend. 

Every business model is different, so consider your specific needs before selecting an accounting process.

2. Separate personal and business funds.

Blurring the lines between personal and business funds can lead to complicated tax issues and potential financial confusion. For transparency and accuracy, it is essential to set up separate bank accounts for your personal finances and your business transactions. This allows you to clearly track your real estate-related income and expenses separately from your personal expenses. Remember, mingling personal and business funds can raise red flags during audits and may impact your ability to accurately analyze your business’ financial performance. Keeping these funds separate is a best practice in real estate accounting that contributes to the overall financial health and integrity of your business.

3. Categorize your expenses and income.

Clear organization is the foundation of good bookkeeping. As your real estate business grows, you’ll need healthy bookkeeping habits to forecast growth and understand your financial opportunities. Consider a few of the different types of expenses that come with operating a real estate business, along with the different sources of income you can expect. 

Expenses

• Realtor association fees
• Commission fees
• Marketing costs
• Administrative assistant services
• Staging expenses
• Photography and video costs for homes
• Gas and wear on your car

Income

• Commissions earned
• Commissions from realtors you add to your team
• Rental income or sales income from investment properties
• Property management fees (if applicable)

With growth comes complexity. You may bring on an assistant or purchase an investment property to flip for a profit. To prevent confusion, establish clear accounting codes related to your business. Each purchase will have a category and a code number associated with it.

If your real estate business has multiple arms (like an agent arm and an investment property arm), you may want to consider establishing multiple LLCs or keeping the books for each business channel separate. This delineation can prevent confusion, while helping you to manage each aspect of your business individually.

4. Understand your commission model.

If you’re working with a real estate brokerage to build up your business and brand name, make sure you have a clear idea of your commission fees and opportunities. Each brokerage charges its own commission structure and creates opportunities for real estate agents to negotiate their percentages, signing bonuses, and other earnings.

Consider the commission systems of a few of the largest real estate brokerages in the country:

• Keller Williams - This brokerage offers a 70/30 split with agents, where the brokerage takes a 30% cut of your commission. However, agents also pay a 6% franchise fee on their sales (up to $3,000). This means you actually have a 64/30/6 split until you pay $3,000 in fees. Additionally, each Keller Williams office has its own commission cap (typically around $28,000). Once you hit that cap in commission fees, you take home 100% of your commissions.
• RE/MAX - This company has multiple commission plans that you can choose from. First, they have a 95/5 plan where realtors take home 95% of their commissions, but pay a 5% desk fee each month. With this option, there’s no commission cap. Realtors at RE/MAX can also opt for a commission split range of 60/40 to 80/20 depending on their previous sales. Once they hit their commission cap, they move up to the 95/5 model. 

If you’re still deciding which brokerage to work for, consider their commission structure and their brand name in your area. You may be able to earn more money by working for a specific firm—even if you pay them more commission than with another option.

A large part of real estate accounting is tracking what you earn in commissions and the fees you’re expected to pay over the course of the year. These numbers determine your take-home pay and your budget for marketing expenses and other investments.

5. Establish your operating costs.

The finances of a real estate professional can fluctuate significantly over the course of a year. You may experience a high number of expenses at the start of the year and then close multiple sales within a few weeks. This means that realtors need to balance their expenses so that they always have enough funds in the bank to cover basic expenses, regardless of the market. 

As you establish your accounting systems, start with your operating costs. Operating expenses (OPEX) are costs that aren’t directly tied to your services. They differ from your cost of goods sold (COGS), which are costs directly related to your services. 

For example, if you keep a marketing agency on a monthly retainer to maintain your real estate website, you will factor this expense into your OPEX. It doesn’t matter whether you sell a dozen houses this quarter or none—you’ll still need to pay the flat marketing fee. Additional OPEX listings include rent, a lease on a work vehicle, and utilities like internet fees or your electric bill. 

Meanwhile, if you hire a photographer to help you market a house on a per-property basis, their services are part of your COGS. If 10 new listings are added within a month and you need to photograph each of their homes, then your photography expenses will be higher than if you have only two clients another month. 

With the uncertain nature of the real estate business, you can use your OPEX to identify predictable costs related to your company. Your electric bill might fluctuate and gas prices might drive up your monthly bills, but you can anticipate costs related to those operating expenses every single month, regardless of your business.

6. Track all of your business expenses.

Once you have your operating costs sorted in your accounting system, you can take steps to track all of your business expenses. 

Real estate agents have some of the most diverse expenses in business. They face costs ranging from landscaping services that improve curb appeal to lunches for clients and gifts for buyers. Realtors’ expenses can reach a few hundred dollars a month or into the thousands, depending on their listings, marketing strategies, and many other factors. Real estate agents also accrue these business expenses daily—which means you can easily get overwhelmed if you don’t have a system in place. 

There are a few ways to keep your expenses in order as your real estate business grows. The first step is to get a business credit card. This card will separate your business expenses from your personal charges, while keeping your monthly costs all in one place. You can also get a business bank account to isolate your business transactions. 

The next step is to look for software that can record your business expenses. With tools like BizXpense Tracker, you can upload receipts and track costs related to certain projects—even if you have to use your personal card. You can also download a gas mileage tracker to log how far your drive. This information will be essential when separating personal and professional gas costs, insurance payments, wear and tear, etc. 

If you set aside a few minutes each day (or an hour or two weekly) to evaluate your charges and business expenses, you can keep your accounts clearly organized. This practice prevents an end-of-month scramble to reconcile your business costs with your bank account balance.

7. Set up double-entry accounting.

Regardless of whether you choose the cash or accrual model for your real estate bookkeeping, you’ll want to establish a double-entry system for your accounting materials.

A double-entry system is based on the idea that every credit has an equal and opposite debit. In accounting, a debit increases the value of accounts (a positive number) while a credit decreases the value of accounts (a negative number). 

For example, let’s say you order business cards and other giveaways to market your business. These cost $500. With a double-entry bookkeeping system, you’ll credit your cash account $500, because that is how much you paid while debiting your marketing assets $500—because you now own cards, magnets, koozies, and other fun items.  

The purchase of marketing materials is a simple example, but double-entry accounting also becomes valuable when you start adding assets to your real estate firm. For example, you can purchase a house to flip for $200,000. You now have $200,000 less in cash, but a significant asset worth that amount. If you flip the house for $350,000, then you can track your profits using the expense accounts in your double-entry recordings.    

Double-entry bookkeeping also provides a series of checks to ensure that each entry is correct. If the two lines of credits and debits don’t align, then something was recorded incorrectly. While it might not seem like a big deal if you mistype your electric bill or are off a few dollars on your commission income, these errors can add up—and might affect your taxes and cash flow. Plus, you will have to return to your books and redo them to ensure that they’re error-free. 

If double-entry accounting seems intimidating, keep in mind that many online systems will fill in the backup entry for you. Your accounting system will ask for a copy of the invoice and the expense category, then do the rest.

8. Reconcile your accounts.

Reconciliation is a crucial part of accounting that ensures all the transactions in your books accurately reflect the transactions in your bank statement. The process involves comparing your internal financial records against the monthly statements issued by your banks and credit card companies to check for discrepancies.

To execute this process, you should start by making sure the beginning balance of your records matches the beginning balance on your bank statement. Now, compare each individual transaction: the date, the recipient, and the amount. If you detect any discrepancies, such as missing transactions, double entries, or discrepancies in amounts, flag them immediately and investigate.

Remember, reconciliation should be performed regularly, preferably on a monthly basis. This is not just a good practice for keeping your books clean, but it's also an effective way to detect any potential fraud or errors early.

If you opt for financial software, most modern systems have an automatic reconciliation feature that simplifies this process. However, it's essential to understand the process and check the reconciliation report to ensure accuracy.

Remember, accurate bookkeeping is not just about compliance—it also gives you a clear picture of your financial health, thus aiding strategic planning and decision making.

9. Evaluate your performance monthly.

The purpose of bookkeeping in real estate provides two benefits: improving your future performance and forecasting your upcoming costs and income. In both cases, you’ll want to evaluate your accounts monthly to make sure your business is operating at its best. 

First, review your expenses and income to understand your profit margins. For example, if you bought a property for $200,000 and sold it for $300,000, it looks like you made a nice profit. However, if you spent 12 months and $90,000 on renovations and marketing, then your $10,000 profit doesn’t seem as impressive. 

Evaluating your profit margins can help you to understand how much money you really make on the sale of homes and renovations of properties. You may decide to adjust your fees or focus more on investment rentals in order to grow your profits. 

Next, forecast your income and expenses for the future. This exercise isn’t always easy in the real estate field. Take your static expenses and OPEX estimates to get an idea of what you can expect to pay in the next few months. You can also use your pending listings to estimate your commissions and income. Depending on the market, you can also create forecasts for your COGS based on your average monthly leads.

Your forecast numbers aren’t meant to be exact figures. However, they serve as informed estimates on your future income and costs. These forecasts can help you understand whether the coming months will be ideal for making major investment purchases or if you’ll need to seek temporary funding sources to cover upcoming costs.

10. Organize your documents.

It's essential to maintain an organized record of your real estate business transactions, contracts, and other related documents. This includes documents related to property purchases, sales, rental agreements, and invoices for any expenses incurred. 

Digitizing your documents can be highly beneficial, as it provides easy access, reduces the risk of loss, and allows for efficient categorization. Utilize document management software or cloud storage solutions for an organized, searchable collection of your important business documents. Regularly backing up these digital files can help prevent data loss. 

Remember, a well-organized document system not only simplifies your business operations, but also streamlines the auditing process and ensures you comply with tax regulations.

11. Prepare early for tax season.

You can benefit from healthy accounting practices throughout the year, but one of the main time-savers for your real estate firm is having your books in order for tax season. There are multiple reasons why your taxes may be more complicated as a real estate professional:

• You will have to sort your business and personal expenses into two separate categories and may need to file taxes for both your business and personal arenas depending on your company’s structure. 
• You will have multiple sources of income as you diversify your revenue streams. You’ll need to account for your commissions, any rental fees, and any profits from the sale of renovated houses that you flipped. 
• You will need to record your deductions and relevant business expenses. 
• You may have to pay real estate taxes on any properties you own during the renovation process. Buying and selling homes as a business can make your taxes more complicated. 

If your business expenses aren’t clearly recorded and labeled, you may miss out on a significant amount of deductible income. If you lack clear balance sheets and P&L statements, it may take longer to file your business taxes. Good accounting habits can make the tax process easier and faster—while also optimizing your tax deductions.

If you want to streamline your tax filing, start reviewing your books in the fall. Make sure all expenses and sources of income are clearly recorded. Pull your receipts and relevant sales documents. Review your income statements. When your CPA or tax-prep service requests this information, you’ll already have it on hand. 

Real estate accounting best practices.

Embracing accounting best practices can streamline your operations and simplify the financial management of your real estate business. Here are a few strategies to consider:

• Utilize real estate specific accounting software - Investing in a real estate-specific accounting software can automate your bookkeeping, making it easier for you to monitor income, expenses, and cash flow. It can also simplify your tax preparation and ensure your financial reports are accurate and up to date.
• Hire a professional accountant - If your budget allows, consider hiring a professional accountant who specializes in real estate. They’ll be able to navigate the unique financial challenges of the industry and can offer expert advice to optimize your financial management.
• Keep personal and business expenses separate - Always maintain a clear separation between your personal and business expenses. This not only simplifies your bookkeeping, but also ensures compliance during tax season.
• Regularly monitor your cash flow - Cash flow is crucial in the real estate business. Regularly monitor your income and expenses to avoid cash flow issues. This will help you make informed decisions about your business and can prevent financial difficulties down the line.
• Maintain accurate and timely records - Be diligent about recording all income, expenses, and financial transactions as they occur. This makes it easier to prepare accurate financial reports and will be invaluable come tax season.

Remember, effective real estate accounting isn't just about keeping books for tax purposes—it's about using financial information as a tool for strategic planning and decision-making in your business.

Common real estate accounting mistakes.

While handling the accounting side of real estate business, it's quite common to make a few slip-ups. Being aware of these mistakes can better equip you to avoid them. Here's a brief outline of the most common ones:

• Neglecting regular bookkeeping - Delaying or neglecting to update your books regularly can lead to inaccuracies and missed deductions, which can significantly impact your bottom line. Try to develop a habit of regular bookkeeping to maintain accurate and up-to-date records.
• Mixing personal and business expenses - It's crucial to keep your personal and business expenses separate. Mixing these can create confusion, make your bookkeeping more complicated, and potentially result in inaccurate tax filings.
• Inadequate record-keeping - Not maintaining comprehensive and accurate records of all transactions can lead to serious issues during tax filing or an audit. These records should include receipts, invoices, and cash flow statements.
• Not utilizing real estate specific accounting software - Real estate-specific accounting software can streamline your accounting process and significantly reduce the chances of errors. Choosing to do everything manually or using non-specialized software can increase your workload and the likelihood of mistakes.
• Failing to plan for taxes - Real estate professionals often overlook the importance of planning for tax season. Not setting aside funds for tax payments or failing to prepare your books in advance can lead to a frantic scramble during tax season.
• Neglecting to reconcile books with bank statements - Failing to regularly compare your bookkeeping records with your bank statements can mean missed discrepancies, leading to potential errors or fraud going unnoticed.

Remember, avoiding these common mistakes can save you from future headaches and ensure your real estate business runs smoothly and efficiently.

Streamlining your real estate accounting process is crucial not just for tax compliance, but also for accurately gauging the financial health of your business and making informed strategic decisions. Regular bookkeeping, vigilant record-keeping, and the use of industry-specific accounting software can greatly simplify this process and minimize the likelihood of errors.

Consider professional help if your budget allows fo it, and always keep business and personal expenses distinct. Remember, good accounting practices are not just about keeping the IRS satisfied—they provide valuable insights into your business, helping you strategize and grow. Avoiding common mistakes and implementing best practices in your accounting can set your real estate business up for lasting success.

Did your small business keep employees on your payroll through the pandemic? Congratulations! You may be eligible for a tax credit from the Internal Revenue Service.

The Employee Retention Credit, referred to as the ERTC or the ERC, was first launched in the early days of the COVID-19 pandemic as part of the CARES Act relief package. It was intended as an extra incentive for smaller businesses to retain their employees, although the Payment Protection Program widely overshadowed it.

The ERC is still available retroactively for both 2020 and 2021, but 2024 deadlines are quickly approaching.

Key Points:

• The ERC is a pandemic relief tax credit that gives qualifying businesses up to $26,000 per W-2 employee.
• Even though it is termed a tax credit, you can get paid in excess of what you’ve paid in taxes.
• Businesses that received PPP loans are eligiblefor the ERC too.
• Businesses have until April 2024 to amend their 2020 tax filing and until April 2025 to amend their 2021 filing to apply for the ERC.
• Given the time it takes to gather the necessary documentation and process a claim, businesses looking to meet the April 2024 deadline should start the application process in Q1 of 2024.

What is the Employee Retention Credit?

The Employee Retention Credit is a refundable tax credit intended to encourage businesses to continue to pay employees throughout government shutdowns during the COVID-19 pandemic.

CARES Act - 2020

The Employee Retention Credit was first introduced as part of the Coronavirus, Aid, Relief, and Economic Security Act (CARES Act) in 2020. The act permitted qualifying businesses to claim 50% of qualifying wages up to $10,000 per employee paid from March 13 through Dec. 31.

Consolidated Appropriations Act - 2021

The Employee Retention Credit was updated in 2021 to allow qualifying employers to claim 70% of qualifying wages up to $10,000 per quarter in 2021.

American Rescue Plan Act - 2021

This act added recovery startup businesses who started their business on or after Feb. 15, 2020, as eligible businesses if their annual gross receipts didn’t exceed $1 million in 2020 or 2021 and they had more than one or more W-2 employees excluding family members.

Infrastructure Investment And Jobs Act - 2021

This act terminated the ERC credit for the 4th quarter of 2021 except for recovery startup businesses.

How the ERC works.

The Employee Retention Credit is a refundable tax credit for qualifying employee wages. The credit is based on payroll taxes rather than income taxes, so you can still receive the credit even if you paid no income taxes in 2020 or 2021.

The best part is because it is refundable, it’s possible to receive money back beyond what you originally paid in payroll taxes. So if you qualify for $50,000 under the ERC, but only paid $10,000 in payroll taxes, you would still receive the full $50,000 refund from the IRS. Bear in mind there is a small non-refundable portion of the ERC that is limited to the amount you actually paid in employee Social Security and Medicare taxes.

How much money will my small business get from the ERC?

For tax year 2020, eligible small businesses can claim 50% of the first $10,000 in wages per employee through the Employee Retention Credit. This adds up to a maximum of $5,000 per worker, and you can apply for this credit now in 2023.

For the first 3 quarters of 2021, eligible small businesses can claim up to 70% of the first $10,000 in wages per quarter for each employee. This amounts to $21,000 per employee.

In total, a small business could potentially receive $26,000 in credits per employee kept employed through 2020 and 2021. Keep in mind that the IRS defines certain health care expenses as part of an employee’s wages.

Is my small business eligible for the ERC?

While businesses of all sizes can benefit from ERC, the program favors small businesses over larger employers.

Number of full-time employees

For tax year 2020, a small business is defined as a business that averaged 100 or fewer full-time monthly employees in 2019. For tax year 2021, the definition is expanded to include businesses that averaged 500 or fewer full-time monthly employees in 2019.

Larger employers can claim the ERC but only for wages and some healthcare costs paid to employees who did not work.

For small businesses, you can claim the credit for all employees whether they worked or not.  

Government-mandated full or partial suspension

Now, to be eligible for the ERC, your business must have been impacted by either a government-mandated lockdown or a decrease in revenue.  

If your business was impacted by a full or partial suspension of operations because of a government COVID-19 order during any quarter, you can qualify. This includes restrictions on hours or capacity. This area of eligibility criteria is complex, so work with a vendor who is familiar with government orders, their impact, and the timeframe they were enacted.

A few examples of a qualifying business include:

• A business that was ordered to fully suspend operations
• An essential business that remained open but had government-mandated limited hours or capacity, such as a restaurant that could use fewer tables.
• A business whose suppliers experienced shutdowns and were unable to make deliveries
• A business that had to shut down a portion of the business due to government mandates

Significant decline in gross receipts

Your business can also qualify if it experienced a “significant decline” in gross receipts as defined by the IRS. For tax year 2020, a significant decline means gross receipts for a quarter are less than 50% compared to the same period in 2019. For the first 3 quarters in 2021, it means quarterly gross receipts are less than 80% compared to the same period in 2019.

For the first 3 quarters of 2021, if your business did not see a 20% decline in gross receipts compared to 2019, businesses can also elect to use the immediately preceding quarter for comparison. This means that if a business’s Q2 of 2021 isn’t eligible compared to Q2 of 2019, it can instead use Q1 of 2021 and compare it to Q1 of 2019 to meet eligibility.

Recovery startup business

If you have a newer business, the ERC was amended in 2021 by The American Rescue Plan to even let you gain access. So-called “recovery startup businesses” can apply for the credit for Q3 and Q4 of 2021. Recovery startup businesses are defined as ones that opened after February 15, 2020, and have annual gross receipts under $1 million for 2018, 2019 and 2020. As long as you meet these two criteria and have one or more W2 employees, you don’t have to meet the other eligibility requirements. The maximum a recovery startup business can receive is $50,000 in ERC per quarter.  

How to apply for the Employee Retention Credit.

First, before filling out any forms, consult your accountant or tax professional. They will help guide your business through this process. Because eligibility might be tricky to sus out, especially if you applied for PPP loan forgiveness, a tax professional who specializes in ERC will be well worth the cost.     

Since you will need to claim the ERC retroactively, you can file Form 941-X to amend your previous return.

What is considered qualified wages?

Qualified wages vary based on the year and size of your business.

In the following situations, all wages qualify regardless of whether employees worked or not:

• In 2020: 100 or fewer full-time employees
• In 2021: Fewer than 500 full-time employees

If you had more than 100 full-time employees in 2020 or more than 500 full-time employees in 2021, qualifying wages are wages paid to an employee while they were unable to work due to suspended operations or a substantial decline in revenue.

A full-time employee is defined as any employee who worked more than 30 hours/week on average. In general, the wages of the owner or family members of the company owner do not qualify.

Cash tips greater than $20/month would be included as qualified wages.

Can I still apply for the ERC during the moratorium?

Quick Answer: Yes, small businesses can still apply for the ERC during the moratorium announced by the IRS.

On September 14, 2023, the IRS announced a pause on processing new Employee Retention Credit claims. The moratorium will last at least through the end of 2023.

What this means

• Applications received prior to the moratorium will continue to be processed.
• Processing times will be longer — potentially expanding from a 90-day turnaround to 180 days or more.
• Payouts for previously filed claims will continue through the moratorium.
• The IRS will begin a more scrutinous compliance review period to protect businesses from bad claims.
• New claims can still be filed, but they will not be reviewed until after January 1, 2024.

Note: The IRS has also announced an ERC withdrawal process for those who are concerned about the accuracy of their claim and have not yet received a refund. Businesses also have the option to amend their ERC claim. Learn more about ERC scams to avoid here.

As a small business owner, your cash flow is your lifeline. But what happens when the cash doesn't flow just when you need it? Imagine if there were a way to unlock the funds tied up in your unpaid invoices, instantly. 

Welcome to the world of spot factoring, also known as single-invoice factoring. This financial tool is all about turning your invoices into immediate cash, enhancing your liquidity and keeping your business running smoothly. Let's delve into how spot factoring can support your business growth.

How spot factoring works.

Getting started with spot factoring involves a few steps which we've broken down for you:

1. Identify the invoice - First things first, you need to identify the invoice you want to sell.
2. Choose a factor - Next, you'll need to find a factoring company. You may want to consider different factors, such as their fee structure, the percentage of the invoice they'll advance, and their reputation.
3. Sell the invoice - Once you've chosen a factor, you sell them the invoice. Typically, they'll advance you a large percentage of the invoice value, often between 70% and 90%, straightaway.
4. Customer pays the factor - Now it's time for your customer to pay the invoice, but instead of paying you, they'll pay the factor.
5. Receive the remaining balance - Once the factor has received the invoice payment from your customer, they'll give you the remaining balance of the invoice, minus their fee.

This process allows you to access the cash tied up in your invoices immediately, helping to maintain a healthy cash flow for your business.

Spot factoring rates and terms.

Spot factoring rates and terms can vary depending on the factor you choose, as well as factors such as your business' creditworthiness and the creditworthiness of your customers. Generally, the advance rate ranges from 70% to 90%, with a fee of around 1% to 5% for every month that the invoice is outstanding.

Qualification criteria for spot factoring.

To qualify for spot factoring, there are a few key criteria you'll need to meet. First, your business must issue invoices to customers on credit terms. The invoices you factor should be due and payable within 90 days. They need to be free of liens and encumbrances, meaning they aren't pledged as collateral in another financial arrangement.

Additionally, the customer you're invoicing must have a good credit history, as the factor will collect the money directly from them. 

Lastly, the invoice must be for work that has been completed or goods that have been delivered. 

Each factoring company may have its own specific requirements, so it's essential to review these before proceeding.

Pros and cons of spot factoring.

Like any financial tool, spot factoring has its pros and cons. Here are a few to consider:

Spot factoring vs. accounts receivable factoring.

Both of these methods are effective ways to improve cash flow. However, they have some key differences that make them more appropriate for different situations.

Spot factoring focuses on one invoice at a time. This type of factoring is ideal for businesses that occasionally need quick cash or want to control which invoices are factored. 

Accounts receivable factoring involves selling a bulk of invoices to a factor. This is a more comprehensive solution that offers consistent cash flow. It's ideal for businesses that have a number of unpaid invoices and need a steady influx of cash. Unlike single-invoice factoring, accounts receivable factoring usually involves a long-term contract with the factoring company.

In both cases, the factoring company will handle the collection of payments, but the choice between spot factoring and accounts receivable factoring ultimately depends on your business' needs and cash flow situation. Make sure to thoroughly evaluate both options to figure out which one is the best fit for your company.

Is spot factoring right for your business?

Spot factoring can provide a much-needed boost for small businesses experiencing cash flow issues. However, it's not necessarily the best option for every business. Consider your specific needs and weigh the pros and cons before making a decision. And as always, it's important to consult with a financial advisor or expert before committing to any financial tool. But if you're looking for a way to turn your receivables into cash and keep your business running smoothly, spot factoring might just be the solution you've been searching for.

Ready to get started? See if you're eligible for accounts receivable financing.

The IRS announced an immediate moratorium on processing new Employee Retention Credit (ERC) claims on September 14, 2023. The moratorium will last through at least the end of the year in an effort to protect small business owners and taxpayers from scams and fraudulent claims.

As a small business owner, you may be wondering what this moratorium means for you and your business. Here’s everything we know and how you may still be able to apply for the ERC during the moratorium.

What we know.

We know that the IRS is continuing to process ERC applications that were received prior to the moratorium. However, processing times will be longer, the IRS advised in its Sept. 14, 2023 update — potentially going from a 90-day turnaround to 180 days or more. The agency has increasingly shifted its focus to review claims for compliance concerns and recently announced that thousands of ERC claims have been referred for audit. It is also working on hundreds of criminal cases on promoters and businesses filing suspicious claims. 

Payouts for these previously filed claims will continue through the moratorium, but at a slower pace due to the more in-depth compliance reviews. This payout period will extend to 180 days from its previously standard processing goal of 90 days, according to the IRS. However, a payout may take even longer if its claim requires the IRS to further review or audit it.

The IRS is implementing this more scrutinous compliance review period to protect businesses from facing penalties or interest payments that stem from bad claims that aggressive marketers pushed.

For any business owners wanting to submit claims after September 14, 2023, while the IRS is not reviewing new applications until at least January 1, 2024, you can still submit an ERC claim during the moratorium.

Applying for the ERC.

Small business owners planning to submit an ERC claim after September 14, 2023 should ensure that their businesses are eligible for the tax credit prior to filling out the stringent application.

Pay qualified wages.

First, ensure that your business paid qualified wages to your employees. The definition of qualified wages varies depending on the amount of employees your business had on the payroll in tax years 2020 and 2021.

For tax year 2020, the IRS defined a small business as a business that averaged 100 or fewer full-time monthly employees in 2019. For tax year 2021, it expanded the definition to include businesses that averaged 500 or fewer full-time employees in 2019.

Larger employers can claim the ERC but only for wages and some healthcare costs paid to employees who did not work.

Small businesses can claim the credit for all employees, whether they worked during the period or not.

Government-mandated full or partial suspension.

Your business must have been impacted by either a government-mandated lockdown or decrease in revenue to be eligible for the ERC. You can qualify if your business was impacted by a full or partial suspension of operations due to a government COVID-19 order during any quarter (this includes restrictions on hours or capacity).

This area of eligibility criteria can be complex, so make sure to work with a vendor who is familiar with government orders, their impact, and the timeframe they were enacted.

Significant decline in gross receipts.

If your business experienced a “significant decline” in gross receipts as defined by the IRS, then it can be eligible for the ERC. For tax year 2020, a significant decline means that gross receipts for a quarter are less than 50% compared to the same period in 2019. For the first 3 quarters in 2021, a significant decline means quarterly receipts are less than 80% compared to the same period in 2019.

If your business did not see a 20% decline in gross receipts in the first 3 quarters of 2021 compared to 2019, you can also elect to use the immediately preceding quarter for comparison. This means that if a business’s Q2 of 2021 isn’t eligible compared to Q2 of 2019, it can instead use Q1 or 2021 and compare it to Q1 of 2019 to meet eligibility requirements.

Recovery startup business.

The ERC was amended in 2021 by The American Rescue Plan to let newer businesses gain access to the tax credit. A recovery startup business is defined as one that opened after February 15, 2020, and has annual gross receipts under $1 million. As long as you meet these two criteria and have one or more W2 employees, you don’t have to meet the other eligibility requirements. If your business qualifies as a “recovery startup business,” you can apply for the credit for Q3 and Q4 of 2021, and your business can receive a maximum of $50,000 in ERC per quarter.

If your business meets these requirements, then it may be eligible for the ERC. When applying, make sure that you have gathered thorough records proving wages paid, gross receipts, government orders, and other required documentation. Please note that businesses that improperly claim the ERC will be required to pay it back, potentially with penalties and interest.

Applying for the ERC during the moratorium period.

You should consult an accountant or tax professional prior to filling out any forms. They will help guide your business through this stringent and potentially confusing process. 

You can apply for the ERC during the moratorium period through Lendio. We’ll help you identify what documents you need to claim the ERC. We’ve partnered with ERC and tax experts to aid you in the complex application process. They can help navigate you through tricky tax laws and avoid costly mistakes while calculating the full tax credit that you qualify for. After your application is complete, we’ll file your ERC claim with the IRS.

Please note that this process will be extended significantly due to the moratorium. While you will be able to submit your application to the IRS prior to January 1, 2024, it will not be reviewed until after that date (and with more stringent compliance review terms).

If you have additional questions regarding the ERC and/or the ERC moratorium period, check FAQ resources from the IRS and Lendio.

The Paycheck Protection Program (PPP) and Employee Retention Credit (ERC) were created to help businesses stay afloat during COVID-19. If the pandemic has had a negative impact on your small business, you might wonder whether you can take advantage of both of these programs. Keep reading to find out.

Key Points:

• The PPP was a forgivable loan. The ERC is a refundable tax credit.
• The PPP loan program is no longer available. The ERC can still be claimed retroactively.
• Businesses that received a PPP loan can still apply for the ERC.
• Employee wages used to receive PPP loan forgiveness cannot be used in your ERC claim.

What Is the Paycheck Protection Program?

Established by the CARES Act and administered by the U.S. Small Business Administration (SBA), the PPP offered loans of up to $10 million to small businesses that faced financial hardship as a result of COVID-19. 

As long as you qualified, you could have received a loan for up to 2.5 times of your average monthly payroll costs. The loan can be forgiven completely if you file a forgiveness application and show you used the proceeds to cover rent, utilities, payroll costs, and other qualifying expenses.

What is the Employee Retention Credit?

The ERC is a refundable payroll tax credit for qualified wages paid to employees in 2020 and 2021. It was created under the CARES Act and administered by the Internal Revenue Service (IRS) to encourage businesses to retain their employees during the pandemic. 

You may qualify if you experienced partial shutdowns due to government orders or significant declines in quarterly gross receipts due to COVID-19. If you meet certain eligibility criteria, you can claim as much as $5,000 per employee in 2020 and as much as $21,000 per employee in 2021.

Differences Between PPP and ERC

While the PPP and ERC were both designed to support businesses that have struggled financially as a result of the pandemic, there are several noteworthy differences between these two programs.

Type of Funding

The PPP offers a forgivable loan. If you used the funds on payroll, rent, and other qualifying expenses, you wouldn’t have to pay it back. In the event you used part of the loan for non-qualifying reasons, that portion won’t be forgiven. You’ll have to repay it with a fixed interest rate of 1% over a period of either two or five years. The ERC, on the other hand, is a tax credit you won’t have to repay.

Funding Time

If you qualified for the PPP loan, you would have received the funds via direct deposit, usually within ten days of approval. The ERC, however, will be distributed to you after you file Form 941-X and the IRS has reviewed your claim. The IRS will process the credit you’re owed and send you a check. The IRS can take anywhere from 3-6 months+ to process your credit. We highly recommend reserving your place in line now by filing the necessary paperwork with the IRS.

Cost 

It was free to apply for the PPP loan. You would only incur a cost if you don’t use the loan proceeds on qualifying expenses and must pay it back. There’s no governmental fee to receive the ERC either. It’s a tax credit that you can receive by filing an amended payroll tax form for each of the tax periods that you qualify for. The only expense you may face will be service charges if you ask an accountant or tax professional to assist in preparing and filing your tax forms.

Eligibility 

The eligibility requirements for the ERCwere updated in 2021. 

2020 qualifications:

• Qualifying wages of up to 100 full-time employees
• A decrease in gross revenue of at least 50% compared to the corresponding quarter in 2019
• Or either a full or partial suspension of business operations created by a government mandate 

2021 qualifications:

• Qualifying wages of up to 500 full-time employees
• A decrease in gross revenue of at least 20% compared to the corresponding quarter in 2019
• Or either a full or partial suspension of business operations created by a government mandate

PPP loan requirements included:

• A small business with 500 employees or less
• The business was operational before February 15, 2020
• For second-draw loans, the business must have used up previous loan funds and demonstrate a 25% or more reduction in gross revenue.

Can You Get Employee Retention Credit and PPP?

Initially, a business that received a PPP loan was not eligible for the ERC. Thanks to the Consolidated Appropriations Act of 2021, however, a business that received a PPP loan may also apply for the ERC retroactively back to 2020. 

The caveat, however, is that you can’t use the wages that qualify you for PPP loan forgiveness to determine your ERC amount. You’ll need documentation that proves you’re not “double dipping” and using both programs to cover the same wages. 

Let’s say you used your PPP funds to pay for $50,000 in wages and you expect to qualify for forgiveness. In this scenario, you can’t use those wages that have been forgiven to calculate your ERC.

How to Apply for PPP and ERC

You can no longer apply for a PPP loan, but you can still fill out an application for the ERC. If you’d like to claim the ERC, you can do so on Form 941-X. Don’t hesitate to consult a tax professional for assistance.

How to Maximize the PPP and ERC

There are a few ways you can maximize the benefits of both the PPP and ERC, including: 

• If you included non-payroll costs in your PPP loan forgiveness application, show you used a minimum of 60% of the total loan on payroll. This way you’ll be eligible for full forgiveness. 
• In the event you don’t list qualifying non-payroll costs on your application, you must prove that you used 100% of the loan amount on payroll to get your loan completely forgiven.
• Provide detailed explanations to help the tax professional you work with understand exactly how the government orders impacted your business. This will help them maximize the amount you qualify for.
• Don’t forget to separate the total payroll costs you used for the PPP loan from the total payroll costs you list with the ERC. This can help you avoid getting denied for using the same payroll costs for both programs.
• Use a tax professional vs. filing yourself. Though you may pay money, these professionals often understand the program much better than you ever could on your own. As a result, they often can help you qualify for more money than you would on your own. They also will help ensure that you file the credit correctly so that in the event of an audit all of your i’s are dotted and t’s are crossed.

Reap the Benefits of the PPP and ERC

If you previously applied for PPP, there’s no reason not to apply for the ERC. By doing so, you can mitigate the financial losses you may have incurred during the pandemic and set your business up for future success.